Oil prices will remain at $40 to $60 a barrel into 2016 as rising crude supplies overwhelm demand, according to the world’s largest independent oil trader.
The oil-production surplus means stockpiles will keep expanding for “the next few quarters” and excess inventories won’t clear until 2017 at the earliest, Vitol Group chief executive Ian Taylor said in an interview.
The forecast, if realised, would mean oil-producing countries and the energy industry having to weather a longer downturn than occurred after the financial crisis of 2008-2009, when prices fell as low as $36 a barrel, but recovered to almost $80 within a year.
“Oil prices will be stuck between $40 and $60 a barrel this year and in 2016,” Taylor said. “I don’t see much reason to go higher and we can go lower” because the physical crude oil market is “quite weak” right now.
Vitol is the world’s largest independent oil trading house, handling more than five million barrels a day of crude and refined products – enough to cover the needs of Germany, France and Spain together.
Brent crude, the global benchmark, dropped to a six-year low of $42.23 a barrel last week, down from more than $100 a barrel a year ago.
While prices rebounded to $51 in London earlier today, they remain 50% lower than a year-earlier.
Crude plunged after OPEC in November diverged from its traditional policy of adjusting supply to manage prices, announcing it would maintain output to defend its position in the market. After an almost 40% drop in prices, the group ratified that decision in June. It is scheduled to meet again on December 4.
OPEC effectively began a price war against higher-cost producers including US shale operations, the North Sea and ultra-deep-water discoveries in Brazil and Angola. So far, however, “non-OPEC production is proving more resilient than expected,” Taylor said.
Daily oil production outside OPEC will grow this year by 1.1 million barrels, compared with an expansion of 2.4 million in 2014, the International Energy Agency said last month. Non-OPEC supply is set to contract by 200,000 barrels per day in 2016, the first drop since 2008, it said.
Taylor, a 59-year-old trader-cum-executive who started his career at Royal Dutch Shell in the late 1970s, said oil demand growth was the only bullish factor in the market.
Global daily consumption will increase this year and next by about 1.5 million barrels and “we are not seeing any dramatic drop in demand in China,” he said.
While the prices slump has hurt oil producers, independent traders such as Vitol and its competitors Trafigura Beheer BV, Glencore Plc, Gunvor Group Ltd. and Mercuria Energy Group Ltd. are profiting from the increase in volatility. The Chicago Board Options Exchange Crude Oil Volatility Index, a measure of fluctuations in prices, averaged 44.28 so far this year, almost double the level in 2014.
These companies also benefit from a market structure called contango – where forward prices are higher than current costs. This allows traders to buy oil, store it in tanks and lock in a higher selling price for a later date using derivatives.
“Contango opportunities are emerging, particularly in products,” Taylor said. Onshore inventories are currently expanding at a rate of 1.5 million barrels a day, although the price incentive is not strong enough to store fuel offshore in tankers, he said.
The price difference between the front-month Brent contract and a year-forward has more than doubled since early July to $7.88 a barrel. The contango is deeper in some refined products, including fuel-oil, Taylor said.
Vitol is betting that demand for oil storage will continue to grow. Varo Energy, partly owned by Vitol and private-equity fund The Carlyle Group, announced Tuesday it has agreed to take full ownership of Rhytank AG, which operates oil tanks in Switzerland. Another Vitol-led venture said Aug. 21 it would pay $830 million for the 50 percent it didn’t already own in storage company VTTI BV from MISC Bhd., a shipping group owned by Malaysia’s national oil company.
Vitol earned $1.35billion last year, the most since 2011, as the trader profited from price swings in the energy market and the widening contango.
The company, formally based in Rotterdam, but with big operations in London, Geneva, Singapore and Houston, reported net income of $837million in 2013, its worst result in 10 years.
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